By Joy Wiltermuth
Oil companies often find religion in the wake of a boom-and-bust cycle, including after last year when crude prices crashed into negative territory for the first time on record.
But with oil prices recently back to $70 a barrel, and some analysts speculating on the return to $100 during the COVID recovery, investors fear wildcatting and other risky financial behavior by energy companies will make a comeback.
“We lost a lot of our weakest companies,” Andrew Feltus, co-director of high-yield at Amundi US, said of the ripple effects of oil futures going negative in April 2020 as demand collapsed with the first waves of COVID outbreaks and oil-producing giants Saudi Arabia and Russia waged an ugly price war.
“No one can exist in that type of situation for long,” Feltus told MarketWatch. “If you don’t have enough money to survive, you are gone.”
Company executives took those lessons for the U.S. energy complex to heart after pandemic shutdowns depressed oil demand and, for a period, led to higher borrowing costs in the sector. It also led to greater prudence.
But there’s no telling how long the latest stretch of “good” energy company behavior — actions preferred by their risk-wary lenders and investors — will last. That’s particularly true if prices shoot dramatically higher and breach $100 a barrel.
As Feltus said, “$50 oil is the price we want. $70 is just gravy. With $100 oil, they will be dancing in the streets of Dallas.”
Prices for U.S. benchmark West Texas Intermediate crude for July delivery /zigman2/quotes/209723049/delayed CL00 +1.24% were near $71.03 a barrel on the New York Mercantile Exchange on Monday, the highest for a most active contract since Oct. 2018 ,according to FactSet.
This chart tracks the plunge and recovery of WTI since April 2020, with the red line highlighting the stretch in which prices stayed below $40 a barrel.
Prices saw a boost Friday from the International Energy Agency, which said global oil demand would return to pre-COVID-19 pandemic levels by the end of next year.
IEA also forecast demand to reach 100.6 million barrels a day by the end of 2022, while indicating that producers will need to boost output to keep up with demand.
The changing landscape for oil, including the increased focus by investors and the Biden administration on encouraging more environmentally sustainable practices, comes as a U.S. rig count has hovered at about half of pre-COVID levels, said Steve Repoff, portfolio manager at GW&K Investment.
But that’s not without its own set of concerns as vaccinations in the U.S. increase, demand for oil climbs and the economy opens more broadly, including over the summer. And the post-COVID travel season could turn costly for drivers.
“It seems these companies, for now, have demonstrated capital discipline, in a sector notorious for being unable to display capital discipline,” Repoff told MarketWatch.